2.

Theoretical Back Ground

2.1 Business Environment of the Firm

To be familiar with the business environment is crucial for every corporation, since the
environment surrounding them is basically what gives their means to survive as well as the
threats for their existence (Chikán, 2008). Therefore, this chapter will elaborate on the
importance of knowing the surrounding business environment, additionally providing
frameworks which makes the analysis of the environment easier.
First, why is it so important to analyse the business environment for a corporation? Well,
it offers insightful information about variables that may affect their performance, operations, and
general success (Porter, 1980; Truyens et al., 2014). To have a better understanding, it is
beneficial to first map out the different layers of the economy.
The first layer is the Macro Environment, which is accountable for such environmental
factors that has an impact on essentially all of the organisations more or less. These factors are
no other than the political, economic, social, technological, environmental and legal factors,
PESTEL for short. The PESTEL framework is useful to find key drivers of change, thus takes
into account how plans have to be revised in response to the various ways that the business
environment might change. (Johnson et al., 2009)

2.2 The Industrial Organisation Perspective - Porter’s Five Forces

The second layer of the business environment is the Industry or the Sector. This group
consists of companies that provide identical goods or services. In this case, Porter’s Five Forces
Framework is very helpful in figuring out which industries or sectors are appealing and whether
there are any external challenges to the current group of competitors. It forms the framework of
all industries, largely determining the standards of competition and the underlying drivers of
industrial profitability.
The Five Forces Framework represents the challenges created by intense rivalry,
powerful suppliers, strong customers, possible new competitors, and replacement goods. Porter’s
idea was that, in an industry where the threat of entry, the threat of substitutes, the power of
buyers and suppliers and the extent of rivalry is high, then the industry is simply not attractive to
compete in, due to high pressure and low return on investment. (E. Dobbs, 2014; Johnson et al.,
2009; Porter, 1989)
The closest surroundings to an organisation is its’ competitors. Similarly to other
industries, the automotive industry contains a wide variety of organisations, each with unique
traits and competing interests. However some of these brands are so far from the core values that,
Mercedes and BMW represents that, it would be irrelevant to compare them, while other brands
can be almost identical. Therefore, it is recommended to identify the surrounding competitors
with the concept of Strategic Groups. This tool helps organisations to map out and categorise
their rivals, by creating different strategic groups. Competitors within one group have similar
strategic characteristics, following similar strategies or competing on similar bases. (Johnson et
al., 2009)
Once the business environment is clear for the organisations, it is time for them to figure
out how they can achieve competitive advantage (E. Dobbs, 2014; Johnson et al., 2009) over
their rivals. To further elaborate on how a business can try and gain edge over their competitors
it is worth to have look at Porter’s Generic Strategies. Porter described four strategies for
achieving competitive advantage, based on the market that the business is operating in, wether it
can be mass or a niche market. The four strategies he represented, were Cost Leadership,
Differentiation, Cost Focus and Differentiation Focus (Islami et al., 2020; Johnson et al., 2009;
Porter, 1980; Truyens et al., 2014). He further added that, a company aiming for competitive
advantage is required to make a choice, about the type of advantage they are going for as well as
the market scope within which the organisation will attain it. The Cost Leadership and
Differentiation strategies are for companies, which are targeting mass markets, while the Focus
strategies are for firms, operating in niche markets.
When a business is winning market share by appealing to cost-conscious or price-
sensitive customers, it is called a Cost Leadership. To achieve it, firstly, firms have to have a
high asset utilisation, which is mainly taking advantage of economies of scale by producing high
volumes of output. Secondly organisations have to achieve low direct and indirect operating
costs, by producing fixed components, not personalised and by building up a cost-conscious
culture with a continuous search for cost reductions. Last but not least, companies have to take
control over the value chain to ensure the lowest possible costs from suppliers. (Porter, 1980)
 Differentiation is a strategy which, adds value by creating a product that clearly stands
out from the rivals, thus it enables firms to charge premium prices. This approach works well
when the market is competitive or concentrated, the target customer segment is not price-
sensitive, the customers have very specific needs that may be underserved, and the company has
special resources and capabilities that allow it to meet these needs in ways that are hard for
competitors to match.
The Differentiation Focus and Cost Focus strategies are, in most of the cases, appropriate
for smaller businesses, targeting a niche segment of the market. It should be also noted that,
these Focus strategies should target such audiences, that are less vulnerable to substitutes or
markets where the competition fails to earn above-average return on investment.

2.3 Resource Based View of Firms

So far, this study was focusing on how the external factors’ influence the operation and
decisions of organisations. Based on the theories reviewed above, firms should be able to achieve
a successful market performance as well as corresponding financials, if they apply the relevant
strategies after analysing and understanding the surrounding market. However, Porter’s view
focuses on the industrial characteristics, but not provides any information about the reason why
different firms might have different outcomes in the same market, pursuing the same strategies
(Barney, 2021). The Resource-Based View of Firms theory has created a framework to gain
insights into this question (Barney, 2021, 1991; Oliver, 1997), shifting the focus of our attention
onto the firm itself.

Figure 1 - The resource-based view (RBV) and the industrial

organization perspective in strategic management, adopted from
(Truyens et al., 2014, p. 461)
 This following paragraph will explore more thoroughly what leads to that differential
firm performance. First of all, companies can rely on either tangible or intangible resources.
Tangible resources refer to physical things, such as, land, building, equipment or capital.
Although these resources can provide a competitive edge over rivals, it is only short-term, since
tangible assets can be bought on an open market. Intangible assets on the other hand has no
physical presence, such as skills, capabilities, know-how or the processes expertise. Unlike
tangible assets, these resources give companies a long-term advantage, due to the amount of time
and money they require to be developed, as well as the rarity of them on the open market.
(Johnson et al., 2009; Wernerfelt, 1984)
The Resource-Based View is also based on two key assumptions, firstly, resources are
heterogeneous and secondly, they are immobile. Heterogeneity in this manner, means that,
possessed resources differ from company to company and even firms with the same external
forces can have different resources, which can eventually lead to differential performances. The
assumption of resources being immobile, refers to the difficulty of taking resources from one
firm to another, in short term. In other words, immobility means that competitors can not
replicate rivals’ resources in the short term. (Barney, 1991; Truyens et al., 2014; Wernerfelt,
1984)
Additionally according to the Resource-Based View, companies must have very
characteristic resources, in order to obtain competitive advantage. Resources must be valuable,
rare, inimitable and organisational or often referred to as non-substitutional. Valuable resources
should reduce costs, while increase differentiation, hence increase value to the customers.
Resources should not only be rare, meaning that it should not be available to competitors, it
should be also inimitable, meaning that it should be really difficult and costly for rivals to
implement.
Last but not least, resources should be non-substitutional, or often referred to as organisational,
which implicates that they should not be available to replace those resources with any other
option or at least it should be costly for rivals to find a substitutional resource. All of these
factors are needed for a firm to drive its’ competitive advantage. (Barney, 1991; Johnson et al.,
2009)
The application of the Resource-Based View in this case is particularly relevant, due to
the unprecedented transformation that the automotive industry is experiencing in the recent
years. A study carried out by F. Hoeft, describes four elements, that represents the core of this
transition, these elements are non other than, connectivity, autonomy, sharing and electrification
(CASE for short). According to Hoeft, the future direction of the auto industry will be mainly
determined by the development of these four factors. Connectivity refers to an information
exchange between the systems, inside and outside the vehicle’s local area network. The goal of
this connectivity is to successfully transfer obtained data and use it to improve customer
satisfaction. Autonomy refers to vehicles, that are able to operate with little or no human
interference, by relying on environmental sensing and interpreting.
Sharing shifts personal car purchase and ownership to on-demand mobility consumption, hence
allowing organisations to leverage shared costs, environmental advantages and social benefits.
Finally, electrification, which raises awareness regarding the transition from combustion engines
to electric powertrains. (Hoeft, 2021)
The RBV is also relevant within the automotive sector, since it is a highly competitive
and technologically driven industry. As it was stated, automakers with cutting-edge technologies,
in-house engine designs, electric vehicle technology, or autonomous driving systems, have
higher chance to gain competitive advantage over their rivals. Strong brand reputation is also a
key resource within this industry, since people prefer to buy vehicles from quality and reliable
perceived brands. In addition, prestigious reputation allow firms to command higher prices for
their products, while it also helps building up a loyal customer base. Efficient distribution
networks and a high standard relationship with suppliers and dealers are one of the most
important contributors to achieving and obtaining competitive advantage. While efficient
distribution networks allow automakers to attain further cost reductions, well established
relationship with dealers gives them a competitive edge by expanding its’ reach and
strengthening customer service. Last but not least, as it can be seen in the car manufacturing
industry, keeping up the pace with regulatory compliance and safety standards is inevitable in
order to obtain competitive advantage. (Hoeft, 2021)

2.4 Institutional Theory of Firms

While the RBV theory has already moved beyond assuming that the market structure and
the firm’s behaviour is deterministic of firm performance and have added the layer of resources
it has been argued that it still has failed to capture other, less explicit components of the
 workings of the firm (Oliver, 1997). The Institutional Theory therefore aims to complement the
understanding of internal factors by considering “the social context within which resource
selection decisions are embedded (e.g., firm traditions, network ties, regulatory pressures)”
(Oliver, 1997, p. 697). In this section we introduce ideas of the Institutional Theory and briefly
discuss how these ideas might influence the automotive industry.

RBV Institutional theory

Key Idea Firms strategically develop and Firms choose practices in response to
integrate practices within systems institutional pressures
Driver Strategy Environment

Manifestation Firms develop complex, unique
practices and integrate them in firm
culture and with other practices
Goals Inimitability / Rarity / Integration
Synergy
Sustained competitive advantage
Table 1 – Based on (Gerhart et al., 1995, p. 13)
Firms imitate the practices of other
firms, especially practices that are
normatively acceptable
Legitimacy
Continued resources, relationships
Survival

RBV focuses on internal factors, emphasising a firm's distinctive and valuable resources
and capabilities, in contrast, Institutional Theory examines external influences, highlighting the
impact of societal norms, regulations, and cultural expectations on organisational behaviour.
RBV underscores the importance of internal strengths for competitive advantage, while
Institutional Theory emphasises the need for organisations to conform to external institutional
pressures to gain legitimacy and societal acceptance.
This theory is especially useful within the automotive industry, since automakers has to
cope with a lot of the above mentioned external factors. First of all, every participant within this
industry are a subject to numerous regulations and standards related to safety, emissions, and
manufacturing processes. Additionally, the institutional pressure related to environmental and
social responsibility, has never been greater before in the auto industry. As the Institutional
Theory stated, industry norms and practices also shape the organisational behaviour, which is
very present in the automobile sector, since it has been always had established norms regarding
the design, manufacturing processes, and marketing strategies. Furthermore, automakers have to
align their portfolio to consumer expectations, which are shaped by the current societal norms
and values.
Even though the theory suggests that companies become the same overtime, they still
often have different organisational responses to these factors, just like the way BMW is
responding to the combustion engine phase out, in contrast to Mercedes. The reason behind it is
that, in most cases profit maximisation and the external requirements are not really compatible.
This leads to continuous fighting between stakeholders in- and outside the company, to
determine what strategy would be the most appropriate.
Within every company, stakeholders differ as well as the power they hold, therefore the
Stakeholder Mapping is a great tool to help analyse these relationships between the stakeholders
and their influence on the organisation. The Stakeholder Mapping is a matrix based on the level
of interest and the power each stakeholder has. It divides stakeholders into four different groups.
The first group has low interest and power in relation with the company, therefore they require
the least effort to be pleased. The second group has high interest, although they do not have
much power over the processes, it is still recommended to keep them informed. The third group
in this matrix have low interest towards the company, however they hold a lot of power,
therefore the third section have to be kept satisfied. The last group includes the key players
among the stakeholders, both their interest and power towards the organisation is high,
consequently their influence on the operation will be undoubtedly visible (Johnson et al., 2009).